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Daily Newsletter, Monday, 04/05/2004

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The Option Investor Newsletter Monday 04-05-2004
Copyright 2004, All rights reserved. 1 of 2
Redistribution in any form strictly prohibited.
In Section One:
Wrap: Markets Rise Again on Monday
Futures Wrap: See Note
Index Trader Wrap: Profits beyond jobs data?
Ask the Analyst: Quarterly rebalancing (update)
Posted online for subscribers at http://www.OptionInvestor.com
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MARKET WRAP (view in courier font for table alignment)
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04-05-2004 High Low Volume Advance/Decline
DJIA 10558.37 + 87.78 10558.59 10465.63 1.72 bln 1422/1442
NASDAQ 2079.12 + 21.95 2079.12 2054.34 1.72 bln 1955/1192
S&P 100 562.86 + 4.76 562.86 557.89 Totals 3377/2634
S&P 500 1150.57 + 8.76 1150.57 1141.64
RUS 2000 606.39 + 2.94 606.42 601.71
DJ TRANS 2955.67 - 10.99 2966.26 2937.95
VIX 14.97 - 0.67 16.64 14.81
VXO 13.88 - 1.68 15.76 13.88
VXN 21.11 - 0.24 22.33 20.97
Total Volume 3,829M
Total UpVol 2,617M
Total DnVol 1,138M
52wk Highs 596
52wk Lows 42
TRIN 0.45
PUT/CALL 0.67
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Markets Rise Again on Monday
by James Brown
A new record high on the ISM services index and strong business
optimism keep the markets in the green after last week's rally.
Although volume was light stocks shot higher in the last hour of
trading while bonds sold off again on the stronger economic news.
In contrast the ISM numbers sent the dollar higher, which
pressured gold futures to a new two-week low.
Investors ignored a new wave of violence in Iraq and chose to
focus on the start of next week's earnings season. A positive
pre-announcement from Cigna sent the healthcare sector higher.
The industry also benefited from news that WellChoice was
considering a merger with Oxford Health. Healthcare stocks were
the best performers followed by disk drives, biotechs, software
and defense stocks. Investors continued to sell interest-rate
sensitive issues like mortgage lenders and homebuilders.
Global markets were higher today boosted by the U.S. markets'
strong performance last Friday. The Japanese NIKKEI soared 142
points and broke through psychological resistance at the 12,000
mark a few times before closing at 11,958. European stocks were
generally higher as well. The English FTSE added 15 to close at
4480. The German DAX cemented its breakout over the 4000 level
with a 41-point gain to 4048. The French CAC followed with a 41-
point rally of its own to 3781.
The Dow Industrials, the NASDAQ Composite and the S&P 500 were
green the vast majority of the session but the three churned
sideways until a last-hour rally sent them to their highs for the
day. Market internals were mixed as advancing stocks tied
declining stocks 14 to 14 on the NYSE. On the NASDAQ, winners
outnumbered losers 19 to 12. The volume numbers were more
bullish as up volume measured almost twice down volume on the
NYSE and nearly three times down volume on the NASDAQ but overall
volume totals were light.
The Dow is up more than 550 points from its March 24th intraday
low. While today's move is a breakout over resistance at 10,500
and confirms the Friday move above its simple 50-dma there's no
denying the index is very short-term overbought. Furthermore it
is approaching more resistance levels in the 10,600-10,750 range
of congestion from January and February this year. The NASDAQ is
in a similar position just to a larger extreme. The Dow is up
5.58% from its March lows. The NASDAQ is up 9.4% from its March
lows near 1900. The tech-heavy index did clear minor resistance
at the 2060-2070 level today and should be clear for that last 20
points to the 2100 level but breaking 2100 may be a challenge, at
least not without some consolidation first.
Chart of the Dow Industrials:
Chart of the NASDAQ Composite:
The S&P 500 has turned in a very impressive run. The index is up
6 out of the last 8 sessions with a gain of 5.4%. The challenge
now is the February-March resistance at the 1160 level. The
breakout over its 50-dma looks great and it managed to close over
the 1150 mark today but like its peers this looks very overbought
and due for a pull back. Meanwhile the small-cap Russell 2000
(RUT)'s 8.8% gain from its March lows has almost managed to keep
pace with the rebound in the NASDAQ. However, unlike the other
indices the RUT has broken out over its first quarter resistance
to new all-time closing highs. This is very impressive and says
a lot about the breadth in this rally but it too looks in need of
a rest.
Chart of the S&P 500 Index:
Chart of the Russell 2000:
Inspiring investor confidence today was the ISM non-manufacturing
index or services index. Economists had been looking for the ISM
services number to rise from 60.8 in February to 61.2 in March.
The markets were surprised to see the index come in at 65.8
percent, a new all-time record. This was extremely bullish for
the economy as 15 of the 17 industries surveyed reported gains
and confirms that consumer spending is still very robust. The
closely watched employment component rose from 52.7% to 53.9%.
New orders jumped from 60.3 to 62.8 and the prices paid component
spiked from 57.2 to 65.7 percent. All told it was the 12th
consecutive month of expansion for the ISM services index and the
sixth month in a row for strength in the services employment
index (Readings over 50 indicate growth).
Wall Street was also encouraged to hear from the Conference
Board's index of business confidence. The survey polls more than
100 CEOs and management confidence soared in the first quarter to
73 from the fourth quarter's reading at 66. Today's number was
the highest reading since 1983. The survey also revealed that at
least half of the CEOs said they planned to begin hiring again
this year.
Continuing with the theme of good news Cigna Corp (CI) raised its
first quarter earnings estimates to $1.75-1.95 per share.
Consensus analyst estimates were significantly lower at $1.33 per
share. In CI's press release the company said "stronger than
anticipated performance from the company's health-care business"
lead to the higher outlook. The news launched an 11% gain in
Cigna's stock to $67.55, a new one-year high. It also inspired a
4.55% rally in the HMO.X healthcare index to 993.60, a new all-
time high. CI probably can't claim all the credit for investors'
positive outlook for healthcare stocks. A Wall Street Journal
article revealed that WellChoice (WC) was considering a bid to
buy Oxford Health Plans (OHP). Shares of OHP rallied 15% to
$57.97 on massive volume while shares of WC slipped 36 cents to
$37.09.
It wouldn't be a Monday without merger news and today was
J.C.Penney's turn to announce one. JCP has long been seeking a
buyer for their Eckerd drugstore chain. The problem was solved
when they found two buyers. JCP will sell its Northeast and Mid-
Atlantic stores to Canadian firm Jean Coutu Group for $2.4
billion. It will sell the remaining stores throughout the
southern states to CVS Corp (CVS) for $2.2 billion. The news
didn't do much for shares of JCP but investors cheered the
acquisition for CVS, the nation's No 2 drug store operator, whose
shares jumped 7.4% to $37.35.
Monday's remaining big headliners were BA, NT and CPTH. Boeing
Co (BA) rallied 1.67% and broke out over resistance at $42 and
its 50-dma after announcing it was close to a deal with the U.S.
Air Force that would allow BA to start bidding again for
government contracts. You may remember that last summer the Air
Force recalled a $1 billion contract after it was discovered that
BA had illegally gained thousands of pages of documents from its
rival Lockheed Martin.
Meanwhile Nortel Networks (NT) relations with the Securities and
Exchange Commission took a turn for the worse. Last October NT
said it would have to restate some of its previous earnings but
the markets took the news pretty well. The SEC decided to look
into it but it remained an informal investigation. About three
weeks ago NT announced it was putting its CFO on paid leave and
launch an independent audit. Investors were less forgiving and
sent the stock lower. Today shares of NT fell 3.65% to $6.06
after the SEC stated it had initiated a formal probe into the
accounting issue.
Falling under today's category for biggest percentage gain is
probably Critical Path (CPTH). Shares of CPTH soared 150% to
$5.08 after announcing a deal with conglomerate General Electric
(GE). CPTH makes security software for identity management and
news that it had won a contract with GE gave investors a huge
boost of confidence.
Speaking of confidence investors are feeling pretty bullish right
now. The markets are breaking out above resistance. Earnings
expectations are strong and negative pre-announcements have been
few and far between. We've actually seen a strong number of
positive upside guidance. Case in point, Kellogg Co (K) raised
its Q1 and full year numbers after the bell this evening citing
strong sales momentum with double-digit sales growth in the first
quarter. Kellogg is upping its FY 2004 numbers to $2.07-2.11
versus $2.05 to $2.09. Focusing back on the larger picture the
recent string of economic news has been good. The jobs number
last Friday has done a lot to confirm the economic recovery and
today's ISM service index blow out is another sign of strong
growth. As a matter of fact some economists are starting to
think that 4% GDP growth may be too low. There was chatter today
that the second quarter may come in closer to 5.5% growth if the
current trends remain in place. Furthermore the short-term
picture looks good. According to the Stock Traders Almanac the
bulls have historical trends as a tailwind. April is the single
best month for the Dow Industrials with an average gain of 1.9%
over the last 50 years. Plus the Passover/Easter holiday week is
typically bullish and the Thursday before Good Friday has been up
five years in a row.
How do we reconcile all this bullish momentum with the fact that
the indices are so overbought? That's a great question. While I
expect the general trend for stocks to remain up, especially as
we move into earnings season, the odds of us seeing some "sell-
the-news" reactions as companies report is strong. Tomorrow
we'll hear from Dow component Alcoa (AA) who reports earnings
after the close. Current estimates are for AA to earn 42 cents
per share, up from 23 cents last year. Tech investors will be
watching YHOO and RIMM who report after the bell on Wednesday.
Currently analysts expect YHOO to report 11 cents a share versus
3 cents a year ago and RIMM is expected to earn 49 cents compared
to a loss of 7 cents a year ago. Both YHOO and RIMM have seen
some very big bounces off their late March lows and unless they
just crush the numbers and the revenue estimates and issue
positive comments for the current quarter then I'd expect them to
see some profit taking.
Let me repeat, I think the trend is still up despite being
overbought but the gains might get smaller as we approach the
10,600-10,700 level on the Dow and the 2100 level on the NASDAQ
and the 1160 level on the S&P 500. Look for the parade of
earnings to hit full force next week.
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FUTURES WRAP
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Futures wrap is not emailed due to the excessive number of charts.
It may be read on the website at this address.
http://www.OptionInvestor.com/indexes/futureswrap.asp
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INDEX TRADER SUMMARY
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Profits beyond jobs data?
The major indices added to Friday's gains, where despite a
further rise in Treasury yields, with the benchmark 10-year YIELD
($TNX.X) rising 8 basis points to 4.22%, investors have shrugged
off some near-term concern that eventual Fed tightening might
stall what looks to be rampant economic growth.
Market Snapshot / Internals - 04/05/04 Close
The major indices dillydallied either side of unchanged for the
first half of the session, where a second-half round of buying
sent the major indices to their best levels of the session with
Healthcare Providers (HMO.X) 993.60 +4.55%, Disk Drives (DDX.X)
129.02 +2.13%, and Insurance ($IUX.X) 336.50 +1.57% offsetting
weakness in Gold ($HUI.X) 230.60 -2.49% and Homebuilders (DJUSHB)
632.43 -1.86%.
Pivot Analysis Matrix -
If not for a market close at 04:00 PM EST, the late spat of
buying may have had both the NASDAQ-100 Index (NDX.X) 1,508.37
+1.21% and S&P 100 Index (OEX.X) achieving their WEEKLY R1s by
the close.
I thought biotech stocks traded well today, where this group,
along with the drug sector may be one of the "overlooked" sectors
among bulls, where Friday's nonfarm payroll data, while too early
to say for sure, may have helped President Bush's chances for
another term.
We've talked before about how geopolitical uncertainties can
create uncertainty in the markets, and with Friday's nonfarm
payroll figures showing growth, some market participants may be
willing to up their exposure to drug and biotech stocks, should
they feel President Bush being assured another term, where
Democratic nominee John Kerry, has mentioned reforms, or
government intervention is needed in order to keep costs under
control. For some, the phrase "cost controls" is equivalent to
"reduction of profits."
Biotechnology iShares (AMEX:IBB) - Daily Intervals
The Biotechnology iShares (AMEX:IBB) $81.17 +1.39% threatens to
break to new highs, where I've set a retracement bracket on the
IBB to really mark an important longer-term breakout, should the
IBB see a trade at $82.00. The recent pullback has found a very
strong bounce from the 200-day SMA, which I'm just noting tonight
came at a correlative bullish support trend on the IBB's point
and figure chart (conventional $1 box).
In recent sessions traders/investors may have noted that the
NASDAQ-100 Bullish % ($BPNDX) reversed up from "bear confirmed"
status to "bear correction status," and I'm making note that
according to Dorsey/Wright and Associates, their Biomedical
Bullish % ($BPBIOM) is still "bear confirmed" status, but close
to reversing up to "bear correction" status. Bulls can still
play the Biotech iShares long (they trade with options) with
partial position on a break higher at $82, where I do think this
sector has a good shot at trading $92 over the next couple of
months.
Some traders/investors that are concerned with regards to higher
interest rates being a negative impact, may like the biotech
group as not being quite as interest rate sensitive as some other
sectors might be, but where a positive catalyst may have been
found from Friday's nonfarm payroll data, if the MARKET now finds
some renewed bullish convictions toward a Bush presidency.
S&P 100 Index Chart - Daily Intervals
The S&P 100 Index (OEX.X) 562.86 +0.85% managed a close above its
still trending lower 50-day SMA, and is the last broad major
index (trailing by at least 1 day) to do so. For those that rely
heavily on moving averages, this would have to be viewed as a
sign of still renewed bullishness. We keep throwing up tests of
resistance for the major indices and a crisscrossing downward
trend and WEEKLY R1 of 564.47 is perhaps the biggest test found
among the major indices.
Tonight, I wanted to review the S&P 100 Components, where I've
sorted them in ascending order (from worst to best) over the past
20-days. While I'm providing comment/focus on the financial
sectors, as it is the rise in Treasury yields, which has some of
my attention, I wanted to look at those components that are
labeled "financial," where it is perhaps the Insurance and Credit
Lenders that might see some benefit from higher rates, which come
from a healthier economy.
S&P 100 Components - 50 worst performers (last 20-days)
I'm note going to analyze the top 50 worst percentage performers,
but wanted to quickly touch on the "financials" and see if we
can't test some things mentioned in this weekend's Index Wrap.
While Monday of next week would perhaps be the better benchmark
against Friday's unwinding in Treasuries, which had YIELDs
jumping higher, we do see 4 "financial" components (LEH, MWD, USB
and MER) among the top 10 percentage losers over the past 20-
days. LEH and MWD are two of the bigger bond brokers on Wall
Street, USB has really become a conglomerate with fingers in many
portions of the financial markets, while I would consider MER
more of an equity-based investment house.
Further down the list, we might note American Express (AXP)
$52.59 +0.30%. AXP not only offers a range of investment
products, but also a consumer credit lending business, where most
of us are familiar with the American Express Card. Hmmmm.... if
rates are headed higher, then maybe credit card lending rates
will increase, giving AXP some greater margin.
S&P 100 Components - 50 best performers (last 20-days)
Continuing with the same sort (20-day percentage gain), there's
Hartford (HIG) $66.60 +1.35%, largely an INSURANCE company that
might actually benefit from rising Treasury YIELDs.
American Intl. Group (AIG) $76.00 +2.24%, which is being added to
the Dow Industrials (INDU). Hmmmm.... INSURANCE that might
actually benefit from a rising Treasury YIELD.
Are bulls in "good hands?" Allstate (NYSE:ALL) $46.50 +0.84%.
Not doing too bad.
Citigroup (NYSE:C) $52.23 +0.83%, not bad for a conglomerate with
a finger in many parts of the financial arena.
Cigna (NYSE:CI) $67.55 +11.37%, which had been performing well,
put on some bullish weight today after saying its health
insurance business was performing stronger than previously
expected.
Jeff Bailey
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Quarterly rebalancing (update)
It's that time of the year where investors might be looking to
review some of their longer-term holdings, where a quarterly
rebalancing is in order.
In a prior Ask the Analyst column (12/28/04) titled "Rebalancing
Makes Sense" we discussed the strategy of rebalancing a longer-
term investment portfolio, where we used a hypothetical portfolio
name "The Beetle's Balanced Benchmark Fund," which is comprised
of various asset classes ranging from U.S. dollars to fixed
income products (bonds) to equities.
Since our rebalancing of December 26, 2004, it has been three
months (time flies doesn't it?) and time to systematically bring
things back into balance, where the fixed income portion of the
fund has seen a health gain, while some of the equity asset
classes have pulled back a bit.
Here's a quick glance at our hypothetical portfolio, where on
December 26, we totaled up the portfolio, and equally divided
that total among the 10 asset classes represented.
Beetle's Balanced - 03/26/04 Close (since 12/26/03)
As noted in prior discussions, the "Beetle's Balanced Benchmark"
was created to provide traders and investors a dated benchmark
for better understand where money was flowing into, and out of as
we review the various asset classes from time to time.
The asset classes in our "fixed income" portion (upper 1/2)
showed gains from 12/26/03 to the 03/26/04 benchmarking with a
nifty 3.38% rise (does not account for interest payments derived
from the securities), while the "equity" classes saw a 1.07%
decline, despite a 1.21% gain in the S&P Depository Receipts
(AMEX:SPY) $111.03, which tracks the S&P 500 Index (SPX.X). For
what we might consider to be the first quarter since last
balanced, the non-strategically balanced fund would have shown a
1.6% gain (does not included interest or dividends received).
In dashed red, I've market those asset classes where rebalancing
would have the investor systematically selling some of those
assets (taking profits in this case), and redistributing those
gains into those asset classes which under performed. An
exercise that is not timed, but simply brings things back in line
with an original weighting from 12/26/03. By selling some of the
fixed income asset classes we would expect to see a decline in
interest/dividend income in the next three months, where this
action may not be appropriate for some investors that rely on
monthly/quarterly income from an investment account to fund their
current lifestyle.
All an investor does is review their original asset allocation
decisions, then note the total value of their investments, and
divide that total value back across the asset classes.
The "Beetle's Balanced" carries a non-strategic asset allocation
of moneys being evenly distributed across the asset classes (not
weighted), where this allows traders and investors to benchmark
how the various asset classes are performing.
In the above table, the Pacholder High Yield Fund (AMEX:PFH)
$10.23 +10.83% just happed to close at a 52-week high on March
26, 2004 and shows this closed-end "junk bond" fund the best
performing asset class in the "Beetles Balanced" where some of
those gains will be re-distributed to other asset classes.
The AMEX Gold Bugs Index ($HUI.X) 230.63, which fell 2.68% during
the quarter would have rebalancing forcing the investor to buy
this asset class at a lower price than found on 12/26/03.
Here's what the rebalanced "Beetle's Balanced Benchmark" fund
would look like at the close of business on April 2, 2004, after
being rebalanced on the close of business 03/26/04.
Beetle's Balanced - 04/02/04 Close (rebalanced 03/26/04)
As of 04/02/04, I would note that the "Beetle's Balanced"
currently shows a total value of 12,123.47, which would represent
a gain of $195.10, or +1.63% gain, since 12/26/03 (compare to
cost in first table shown). While the rebalancing was not meant
to try and time the market, it would appear that the 2.18%
decline from the fixed income portion of the fund (does not
include gain from interest income) versus the +3.46% gain for the
equity side of the portfolio would have benefited the portfolio.
Traders and investors will want to note that on Friday, April 2,
2004, the fixed income side of the portfolio saw declines, where
the percentage declines accounted for a greater portion of
declines found in just the past week, where economic data
released showed a sharp gain in the nonfarm payroll numbers.
Meanwhile, equities, which have been in a rebound mode for the
past week, seem to be benefiting from a decline in fixed income
investments, perhaps suggesting a rotation from asset classes
often associated with "safety," where investors are willing to
take on more risk, with prospect for growth.
On Friday, I received a question from a trader/investor regarding
the potential negative impact a tightening Fed might have on
corporate bonds (LQD in our fund) and "junk bonds?" if hiring is
picking up. The trader/investor wondered if it was reasonable
for higher grade corporate bonds and lower grade, but higher
yielding junk bonds to see price appreciation of the underlying
bond, as stronger employment numbers should eventually equate to
stronger corporate profits, where those profits are used to pay
interest on debt, or possibly retire corporate debt obligations
at par.
This is a tough question to answer, but here is the thought
process I have.
Let's take the RISKIEST asset class in our fixed income section,
and the Pacholder High Yield Fund (PHF) $9.76, which just
recently declared and paid its monthly dividend (since this is a
closed end fund that trades on the AMEX, distributions to
shareholders are described as a dividend, not an interest, or
coupon payment) of $0.075 per share. At Friday's closing price
of $9.76, if I were to assume the current monthly distribution
stays the same for another 12 months, the effective dividend
yield would be ($0.075 x 12 = $0.90) then ($0.90 / $9.76 = 9.22%)
9.22%.
Junk bonds are an interesting asset class, as this debt has been
issued by company's that may not be as financially sound, or have
lower debt ratings (Moody's, Standard and Poors) that other
corporate bonds currently available in the marketplace. But as
the trader/investor noted, an improving economy that begins to
show some sign of healthier gains, may indeed be beneficial for
PRICE gains in both higher GRADED corporate bonds, but to a
greater extent, junk bonds.
Let's stick with the RISKIER junk bond asset class, but quickly
review the LESS RISKY Treasury bond. While the thought that the
Fed may begin raising interest rates should the labor market show
continued improvement, the Treasury bond market would most likely
find selling, as their YIELDS are more directly impacted by what
the Fed is doing with interest rates. After all, a Treasury
bond's coupon is paid by the government, where that coupon's
promise is backed by the full faith and credit of the U.S.
government.
What is a necessity to understand is that when the Treasury
auctions off bonds (say $25 billion worth of 5-year notes, which
will pay a 3% per year), what the Treasury is really doing is
selling a $1,000 face value bond at a discount to the face value
of $1,000, where as the bond reaches its maturity (5-years) the
bond will be worth $1,000.00 dollars again. Between auction
completion and maturity, a 5-year bond that was auctioned off at
3%, would have returned 3% per year, over 5 years, to that
bondholder. (This is a very generic explanation).
For the RISKIER junk bond asset class, there are different
dynamics in play. Again, we're assuming that the Federal
Government will not go bankrupt (remember who owns the printing
press for printing money), but a corporation that is of lower
credit quality, while still promising to repay its bond debts
with interest, can always file for bankruptcy protection, where
bondholders of their debt can be left with nothing.
There are undoubtedly some junk bonds currently trading in the
market that have a stated coupon of 15%, where when this bond was
underwritten (maybe within the past two years, during the
economic downturn), or first offered to the market, the company
that was selling these bonds didn't have a sound balance sheet,
and went to the debt markets to raise capital. The higher coupon
of 15% was needed in order to attract investors, as the company's
financial situation was weak. However, the company offering this
high yield, felt that the money raised from the offering would
give it the needed cash to survive the economic downturn, and
once the economy improved, the company's financial situation
would improve, revenues and earnings would increase, which would
then allow the company to be able to pay a 15% annual debt to its
bondholders.
Junk bonds (and higher grade corporate bonds) can see PRICE
appreciation, regardless of what the Fed does with interest
rates.
Let's use the example of a junk bond, which I bought with a 15%
coupon, where this bond currently trades in the market for $0.95
on the dollar ($950), or a 5% discount to its face value of
$1,000.00. Should the company's financial situation begin to
improve with the economy, other investors in the market place may
deem this company's debt as "not as risky anymore, or worth the
risk" and begin buying, or bidding up the bond's price from $950
to $1,000. At this point ($1,000.00) this bond, with a face
value of $1,000.00, is now effectively YIELDING 15%. At this
point, let's also assume the Fed has raised its fed funds rate a
couple of times.
Do you see how a corporate, or junk bond can still see some
gains, regardless of what the Fed is doing with interest rates?
Here's the tricky part!
Let's now roll forward another 6-months, and the economy is
consistently generating 300,000 jobs a month and that junk bond I
bought for $1,000 is worth $1,020, and I hold a paper gain of
2.0% in the underlying bond's price, and I've held this bond for
2-years, and have collected $300.00 in interest payments (on 1
bond I bought for $1,000), which on a $1,000 investment is
equivalent to a 30% gain.
At this point, with the bond trading $1,020 in the market, I've
not only collected some additional income, but hold a little
profit. However, in my ongoing discipline of assessing
risk/reward, I begin to understand that the effective yield for
any buyers of this bond is now at 8% if held to maturity. Let's
also assume that the Fed has raised its fed fund rate further to
2%.
I might continue to hold this bond if it still fits my investment
profile, but I might also begin to consider other alternatives
that I deem to have a higher potential rate of return given
assessed risk. Perhaps stocks, maybe gold bullion, or a diamond.
Heck... maybe another dog. This time a well trained one!
Some investors that have realized above expectation returns in
junk bonds may also find a 5-year Treasury bond with an effective
yield of 4% per year as now being attractive. (Note: Current
YIELD on the 5-year is 3.121%)
You see, a high grade corporate, or even a junk bond, will
certainly have some risk/reward assessment made as to what the
Fed is doing with interest rates, but at the higher end of risk
in the fixed income class, a junk bond, or RISKIER and higher
yielding bond is really tied right back to the financial shape of
the company that has issued the bond.
In the case of Pacholder High Yield Fund (PHF), should the
economy begin to show continued and more rampant improvement, he
is going to eventually find that some of the bonds he has
purchased in the past will have by now been called back by the
company that sold the bond, as their earnings have allowed them
to buy back this previously issued debt at a 15% coupon. With
the economy doing so well, the Pacholder High Yield Fund (PHF)
manager may also find that it is difficult find any new bond
offerings, where company's are issuing new debt anywhere close to
15%, and perhaps just 12.5%. If so, then the Pacholder High
Yield (PHF), or many junk bond funds, will most likely have to
lower their dividend payouts.
And this is where the risk/reward game is found as a never-ending
process in the market. When investors begin to weight the risk
of buying a junk-classified bond with a 12% coupon against a
Treasury that by now may be yielding 6%.
That's a rather length attempt to explain some relationship
between a Fed raising interest rate and junk bonds, but hopefully
gives some insight into how different bonds, outside of
Treasuries, can still find gains.
We'll continue to follow and update ourselves on these various
asset classes to see how they are performing, and check their
performance against different scenarios, which could be in play.
On a last note, it was probably two months ago that a subscriber
that told me he has read somewhere that rebalancing a portfolio
every quarter could add to its performance by approximately 1%
per year, and asked if I knew of any studies that could back up
those claims.
I do not personally know of any, but maybe by the end of this
year, we'll find out for ourselves if there is benefit to
rebalancing.
While the hypothetical "Beetles Balanced" is more heavily
weighted toward the fixed income side of asset classes
represented, I'm keeping the records for what the fund was worth
from original benchmark of 12/26/03. Here's what it would look
like as of Friday's close.
Beetle's Balanced - 4/02/04 Close (no rebalance since 12/26/03)
Our benchmark will still be the $11,928.37 we started with at the
12/26/03 date (COST column : Total row).
To really provide the most accurate results, I would need to keep
track all dividends and interest received over the year, which
unfortunately, I don't have the time to do, where the partial
buying and selling of assets classes over the quarter's would
impact the true realized profits/losses found over time.
I do see that the Pacholder High Yield Fund (PHF) has
outperformed the other asset classes since 12/26/03 benchmarking,
where perhaps the scenario of a recovering economy along with a
higher YIELDING investment has continued to attract investors
money.
Gold equities as depicted by the AMEX Gold Bugs Index ($HUI.X)
and the shorter-term (SHY), intermediate-term (IEF) and Longer-
term (TLT) Treasury asset classes would show relative
underperformance.
Jeff Bailey
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The Option Investor Newsletter Monday 04-05-2004
Copyright 2004, All rights reserved. 2 of 2
Redistribution in any form strictly prohibited.
In Section Two:
Stop Loss Updates: CAT, EBAY, MGG, PDCO, ESRX, NSM
Dropped Calls: None
Dropped Puts: None
Watch List: Mostly Bullish
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EBAY - call play
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MGG - call play
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Prepare to EXIT at 49.95
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PDCO - call play
Adjust from 67.90 to 69.99
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ESRX - call
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NSM - call
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Watch List
**********
Mostly Bullish
---
American International Group - AIG - close: 76.00 change: +1.70
WHAT TO WATCH: With strength still resident in the Insurance
sector, AIG gave an impressive breakout move on Monday, soaring
more than 2% on volume well over the ADV. This looks like the
beginning of our long-awaited breakout, which should carry the
stock first to the $80 level and then to stronger resistance near
$85. Entries look viable either on a breakout over today's
closing high or on a mild pullback to confirm support near $74.
Chart=
---
Lehman Brothers - LEH - close: 81.88 change: -0.79
WHAT TO WATCH: Notable for its relative weakness of late, LEH
looks awfully close to breaking down and the poor performance of
the past two sessions drives that point home. The stock is
already on a PnF Sell signal with a target of $73. Use a trigger
below $80 and target a drop to the 200-dma.
Chart=
---
Johnson Controls Inc. - JCI - close: 59.70 change: +0.80
WHAT TO WATCH: Once again, JCI is spoiling for a breakout and
Monday's rally brought it really close to that mark. The stock
has been consolidating in this tight range for a couple months now
and a breakout could generate some strong follow-through buying.
Use a trigger over $60.25 and target a rally to the $65-66 area.
Note the potential resistance area near $62.
Chart=
---
Eli Lilly Company - LLY - close: 69.15 change: +0.45
WHAT TO WATCH: The recent rebound from strong support near $65
made sense, but the nature of the rebound looks quite unhealthy,
rife with gaps. With the stock nearing strong resistance at $70,
also the site of the 50-dma and 100-dma, this looks like a great
spot for an aggressive bearish play. Short the rollover and look
for a drop first to the 200-dma and then the lower gap near $66.
Use a tight stop just over $71.
Chart=
---
===================
On the RADAR Screen
===================
JNPR $27.58 - Shooting for the highs? JNPR is looking stronger by
the day. After breaking back over the 50-dma last week, the stock
is now testing next resistance at $28. A breakout over that level
should have the January highs near $31 in play.
SPW $45.75 - So close! SPW has inched right up to resistance over
the past couple weeks and is poised for a breakout. Consider
bullish positions on a break above $46.75 and target the 200-dma
near $50 and then the top of the gap near $53.
*******************
FREE TRIAL READERS
*******************
If you like the results you have been receiving we
would welcome you as a permanent subscriber.
The monthly subscription price is $49.95. The quarterly
price is $129.95 which is $20 off the monthly rate.
We would like to have you as a subscriber. You may
subscribe at any time but your subscription will not
start until your free trial is over.
To subscribe you may go to our website at
www.OptionInvestor.com
and click on "subscribe" to use our secure credit
card server or you may simply send an email to
"Contact Support"
with your credit card information,(number, exp date, name)
or you may call us at 303-797-0200 and give us the
information over the phone.
You may also fax the information to: 303-797-1333
**********
DISCLAIMER
**********
Please read our disclaimer at:
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